IMF Working Papers

The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries

ByBassem M Kamar, Damyana Bakardzhieva

July 1, 2010

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Bassem M Kamar, and Damyana Bakardzhieva. "The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries", IMF Working Papers 2010, 154 (2010), accessed 12/14/2025, https://doi.org/10.5089/9781455201372.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Attracting capital and foreign exchange flows is crucial for developing countries. Yet, these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness, jeopardizing exports and growth. This paper investigates this dilemma by comparing the impact of six types of capital and foreign exchange flows on real exchange rate behavior in a sample of 57 developing countries covering Africa, Europe, Asia, Latin America, and the Middle East. The results reveal that portfolio investments, foreign borrowing, aid, and income lead to real exchange rate appreciation, while remittances have disparate effects across regions. Foreign direct investments have no effect on the real exchange rate, contributing to resolve the above dilemma.

Subject: Balance of payments, Capital flows, Foreign direct investment, Foreign exchange, Portfolio investment, Real effective exchange rates

Keywords: Africa, appreciation, appreciation of the REER, capital, Capital Flows, Competitiveness, Developing Countries, East Asia, Emerging Markets, FDI, FDI flow, flows to the CEECS, Foreign direct investment, Foreign Exchange Flows, GDP, investment, investments flow, Panel Data Econometrics, portfolio investment, Portfolio investment, portfolio investment outflow, portfolio investments to the region, Real effective exchange rates, Real Exchange Rate, REER appreciation, REER behavior, REER determinant, REER equilibrium, South Asia, WP

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